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Overview

Tunisia remains a country of contrasts; while important progress has been made on the political transition to an open and democratic system of governance, making the country a unique example in the Middle East and North Africa (MNA) region, economic transition has not kept pace.

Internal constraints, notably the fragmentation of the political party system and the related difficulty in reaching consensus on the key economic reforms, have combined with external constraints, mainly the conflict in the neighboring Libya and the continued threat of instability, to slow down economic recovery and to generate growing social dissatisfaction with the lack of employment opportunities.

Youth and women have been particularly affected by the lack of economic opportunity: Tunisia is one of the few countries where a higher level of education decreases employability, in particular for women. Youth and women, in inland areas, are affected to the greatest degree, and the resulting growing outward migration of youth from these regions poses a growing threat to Tunisia’s long term economic competitiveness.

Macro-economic context:

A modest economic recovery is underway with an acceleration of growth, investment and exports, although macroeconomic imbalances remain high. Tunisia’s economic growth is slowly gaining steam. After recovering modestly to 2 percent in 2017, growth accelerated to 2.5 percent in Q1 of 2018 and 2.8 percent in Q2 (y-o-y), supported by agriculture, tourism, and export-oriented manufacturing particularly electrical and mechanical industries. On the demand side, growth was driven by exports and investment. Unemployment remained high at 15.4 percent in Q1 of 2018, but dipped slightly among graduates, recording 29.3 percent compared to 29.9 percent in Q42017.

Inflation accelerated from 4.2 percent in December 2016 to 7.8 percent in June 2018, the highest level in a generation, fueled by currency depreciation, administered energy price increases, wage inflation and credit growth. In response, the Central Bank increased its policy rate three times since April 2017 to 6.75 percent, but key interest rates remain negative or near-negative.In July 2018,inflation decelerated slightly to 7.5 percent.

The country’s challenging external position persists, with wide trade and current account deficits, depressed FDI, and shrinking international reserves (3.1 months of imports at end-2017). In Q1 of 2018, the current account deficit improved, supported by 2017’s real exchange rate depreciation, a trade balance improvement, and higher tourism receipts and remittances buoyed by stronger growth in Europe. However, foreign reserve coverage fell to 71 days of imports by end-July, despite Central Bank efforts to stay within the FX intervention budget since March. The dinar dropped below TD 3 per Euro in April 2018 and continued to depreciate albeit at a slower rate than in 2017.

Poverty context:

According to official numbers, the 2015 poverty rate in the country was 15.2 percent, significantly lower than the rate of 20.5 percent in 2010 and 23.1 percent in 2005. Nonetheless, regional disparities are evident with the North West and Center West showing much higher poverty rates than the national rate: 28.4 percent and 30.8 percent, respectively. In terms of policies aimed at the poorest strata of the population, Tunisia has in place an unconditional cash transfer program providing a social safety net (SSN) to about eight percent of the population. 28 percent of the population also receives health care insurance cards through this program for subsidized services. Eligibility is based on a combination of categorical criteria and a variation of community-based targeting, determined by social worker interviews and local committees. However, targeting, information and monitoring of these programs is considered relatively weak. In addition, a large share of the working age population is either idle, unemployed, or working in low-quality jobs. In 2014, around one third of the youth population were categorized as Not in Employment, Education or Training (NEET).

lastupdated: Oct 09, 2018

Bank Program

The requested lending program for FY 19 and FY 20 has a strong emphasis on SOE reforms, with operations in the Energy and Water sectors focusing on improved utility performance along with investments and capacity building to prepare these sectors for PPP based investments.

A similar engagement for the sanitation sector is also under preparation but may take more time to be completed. This is paired with support for e-Governance (with a focus on cross-cutting issues and social sector service delivery), Entrepreneurship, Economic Corridor Kasserine-Sidi Bouzid Sfax and Oasis Sustainable development scale up.

Portfolio

The PLR and DPF ($500m) went to Board on May 22, 2018. The PLR did: i) update the Board on the evolving political and socio-economic situation in Tunisia; ii) extend the implementation period of the CPF by one additional year and iii) program IBRD lending resources for FY19 - FY21. Exposure constraints were identified limiting IBRD’s ability to lend; lending requests from the government total US$ 1.7 billion. Ongoing discussions on potential exposure swap/guarantee arrangements with partners to allow the Bank to continue to deliver our lending program.

As for disbursement, the targeted 20 percent disbursement in FY 18 has been exceeded (22.49%). With the number of new projects in the portfolio, maintaining the same rate will be a challenge. No IBRD problem projects at end-FY18 and No IEG disconnect.